I'm not betting on it. While the Fed has signalled that it will cut rates three times in 2024, and I believe them, any projections for what will happen after that are a coin flip.

There's are plenty of good reasons to believe that there will be a nasty (er?) recession, and every reason to believe that the Fed will get their "soft landing" as they define it. One might result in rates dropping quickly. The other might not.

Right now, the yield curve is still inverted, and it has been close to flat or inverted for nearly two years. It's the longest inversion since 1980. That's important.

Normally, the 10-year treasury is ~150 bps higher than the Federal funds rate - currently about 5.3%. That implies a 10-year treasury rate of 6.8%, vs the current 3.95%.

If the Fed lowers rates, as widely anticipated, in 3 times 2024, by 25 bps each, perhaps with one 50 bps decrease if we are being optimistic, the federal funds rate will drop to 4.3%-4.6%.

In a normalized yield curve environment, with a 150 bps spread between the 10 year and the federal funds rate, that puts your 10-year at 5.8% - 6.1%. There is no historical reason why this can't happen, despite the hammering on by certain folks about how 2024 is an election year, and how the US Federal Debt can't handle interest rates being held this high. Those are points, but in my opinion, secondary and irrelevant to the Fed's charter of controlling inflation.

And, if rates stabilize and the economy doesn't crash or change much from where it is today, I think it could very well happen.

Why all this talk about treasuries and the yield curve? Well, because mortgage rates typically run at a spread with the 10 year treasury - again, about 150 bps. Right now, that spread is unusually high - about 280 bps. Probably because the mortgage industry agrees with my analysis above.

In 2024, I think that the most probable outcome is this:

- The Federal Funds Rate drops to ~4.5%. The 10-year treasury approaches, but does not quite hit, 6%.

Mortgage rates normalize to the 150 bps+ the 10-year treasury, approaching, but not quite hitting 7.5%.

Anyways, that's my complicated logic. It changes little for investors and homebuyers. It's a modest increase from where we are today, and the headline from my analysis is that it's likely that mortgage rates could climb a little, but will likely stay close to flat.

My analysis is probably wrong and there are plenty of ways that it can go in 2024. Would love thoughts and feedback, and of course completely agree in advance with the inevitable feedback about the futility of trying to predict interest rates in the first place.

Scott Trench

Podcast Guest on Show #223